Paul Philpott, president and chief executive at Kia Motors UK talks to Richard Brown about the brand’s retail ambitions and its finance joint venture with sister-marque Hyundai and Santander Consumer Finance
South Korean manufacturer Kia sold its first car, a Pride, in the UK in 1991. Since then it has sold half-a-million units, 250,000 of which have been in the last five years. By 2007, when Paul Philpott joined the brand as managing director, it was selling 30,000 units. In 2012, when Philpott returned as president and chief executive after 31 months working for Kia’s European operations, it sold 66,629 cars and this year, says Philpott, it will sell 72,000. The potential, he adds, is there "to be a 100,000-unit brand", which would put Kia well within the UK top 10, "probably before the end of this decade". The only requirement is "to keep pace with demand because, globally, on some model lines, we’re well at production capacity right now".
The rise in sales has been accompanied by a shift in finance, which Philpott believes is contributing to the success of Kia by providing "accessibility for consumers" to the brand and increasing the profit potential of its dealer network.
In 2007, "finance was a relatively small part of our business" and run through a white label agreement with Black Horse before 12 months with GE Capital. In 2009, with new car finance penetration at 15%, Kia switched to Santander Consumer Finance and the dealer network wrote £61m of retail paper in the first year, operating as Kia Motors Finance. The agreement was planned for four years, but shifted to a joint venture finance operation, now 15 months old, and wrote £220m of retail paper last year.
"This year, I am confident we will exceed that," says Philpott.
The joint venture, on whose board Philpott also sits and which includes sister brand Hyundai, has recorded new car finance penetration of 49.6% for the first eight months of 2013, "very close" to the aim of 50% announced by Tony Whitehorn, managing director of Hyundai UK, in July 2012.
Richard Brown: What did you learn from your time in Europe?
Paul Philpott: A huge amount about the diversity of Europe. To work in continental Europe, based in Germany, to spend time with people from 25 different markets, you realise just how diverse Europe is, culturally, historically and in working practices.
That’s the challenge of any European head office role: it’s the huge diversity you have across the 25 or 27 markets that you represent.
Having spent time with all the different markets around Europe I’ve learned there are lots of best practices. You can never believe you are doing everything as well as you can. There are always ways of improving: working with different markets, understanding how different markets attract new customers and retain existing customers, particularly the more mature markets, because they’re like the UK, introducing new initiatives to drive more business at a similar level. Being able to take some of those best practices from across Europe and instil them here in the UK has no doubt been to the benefit and further growth of Kia in the UK.
We’re the biggest market for Kia in Europe – I obviously exclude Russia – and, clearly as a mature European market, there’s a lot you can learn from the competition we have here.
The big markets of the US, China, Russia, increasingly South America and obviously the domestic market of South Korea, are all critically important, but Europe is the most competitive market anywhere in the world, and the UK is the leading market within Western Europe. This year we’ll account for about 20% of Kia’s sales in Western Europe.
Brown: With the success in retail, what practical support are you able to offer your dealers?
Philpott: I firmly believe, having worked now in the automotive industry for three different brands and 25 years, that partnership with the dealer network is critical to the success of a player in any market. That was confirmed in the way different markets worked across Europe with their dealers. The dealer network is in business to make money and unless your dealer network is profitable and confident in making future profits and future returns from a franchise, they won’t be making the investment you want them to make in facilities, people, processes and capacity. We’ve grown from 30,000 units to 72,000 and so has the dealer network. They’ve invested in the long-term future of Kia. They’ll only do that if they have the confidence in us as a management team, confidence in us as a brand, and confidence they can make a long-term return from their investment.
In terms of practical steps, it’s having a team of people under my command here, working in partnership with the dealer network at all levels. That means day-to-day contact through a field person, but also contacts and support in all functions of the business, whether sales, aftersales or marketing support. Ultimately all these things come together and you’ve got a strong business model that the dealer can feel confident in the profit returns for the future.
It’s the rate of progress, the acceleration of Kia over the last five years which is the real achievement. No brand can achieve the sort of acceleration in sales we’ve achieved over the last five years without a strong partnership with their dealer network. The profitability, and therefore the investment in capacity, the dealer and network have been able to make is critical to our success.
Brown: How will finance help you towards the aim of 100,000 annual sales?
Philpott: Our partnership with Santander and Hyundai Capital through our joint venture finance operation is a key strategic part of the growth plan of Kia in the UK.
First, we’re working, as part of the joint venture, on ensuring dealers have the right funding lines to be able to continue to grow their business, fundamental to any growth plan. We approach the wholesale funding for dealers on a collaborative basis. Therefore, we’re providing the funding required to support our own growth plans.
When you look at the growth over the last five years, a large proportion of that growth has been to conquest customers, new customers to Kia. Alongside the conquest business, we need to build retention; loyal customers buying again. Of course, PCP, as a finance tool, is central to our sales growth plans. We kicked off with PCP about four years ago, albeit on a small basis. It takes time to grow. This year, somewhere between 75 and 80% of all retail finance will be on PCP. The renewal possibilities we will have on Kia Access, our PCP product, in two years’ time will deliver a significant additional opportunity for sales growth.
Brown: How was the joint venture set up and what role does Kia play in it?
Philpott: If you go back to start of 2009, we started a private label finance operation, which was a Santander business, branded as Kia Financial Services. That grew successfully and therefore we decided to partner Santander in a joint venture.
We have, as part of the Hyundai-Kia Group globally, a finance arm called Hyundai Capital, so the four shareholders within the joint venture operation in the UK are Santander, Hyundai Capital, a shareholding by us, Kia Motors UK, and a shareholding by Hyundai Motors UK. There are four shareholders in the organisation and we operate very much as a joint venture.
At an operational level, we share objectives, we work up business plans together on both sides of the business, wholesale funding and risk management plus retail finance programmes, and we work in partnership with the team at Kia Motors Finance, which is the Kia front-end of the Hyundai Capital UK Ltd joint venture.
Brown: What are the advantages of the joint venture over a straightforward white label agreement?
Philpott: Clearly, in a white label agreement, the partnering finance organisation takes all the risk and reward. In a joint venture, it’s a shared business. Therefore we can make better decisions about the risk of lending to individual dealers, of the ability of dealers to invest in greater expansion, and what funding requirements are going to be needed over a period of time, and by whom, long before actually being required, because we’re in partnership and we talk about our growth plans and align them.
We can also respond to competitive activity more quickly and more appropriately. There is a common sharing of objectives and processes. Let me give a couple of examples: We have the Kia Motors Finance marketing manager, who is a full-time employee of the joint venture, permanently based within our marketing team. The head of the field team for Kia Motors Finance sits on our dealer council, alongside us. They’re very much in partnership with us. That partnership is fundamentally different than when it was a white label agreement.
We still have the advantage that we are first and foremost a motor manufacturer, and we sell and service new products. Santander is first and foremost a bank, a financial institution. Moulding these together and bringing the best out of both parties is a real strength right now when you’re dealing with a dealer network which relies on both of you.
Will we ever buyout Santander and become a fully-fledged finance house? I don’t know when or whether there would be significant advantages in doing that. That’s something for the long term.
Brown: Are we seeing the peak of subvented finance?
Philpott: There are certainly some incredibly attractive finance offerings on the market from some manufacturers. You only have to scan the internet for about a minute and you’ll find some manufacturers offering five years’ 0% finance. That’s pretty attractive and not something we offer. Our focus is almost singularly on PCP because we believe in trade-cycle management and we believe PCP is the right product to ensure customers can afford to have a new product every three years, which is good for us and great for them.
All year we have offered a two- and three-year PCP product at 4.9%, which works well for us. There may be more attractive rates on offer from some manufacturers, but we are seeing a very strong level of finance business at 4.9%. Our level of PCP penetration will be over 75% this year.
We’re in a position as a manufacturer where we don’t have excess production capacity in Europe, and therefore are in a different position to some other brands when it comes to how aggressive they want to be in the marketplace. One of my biggest challenges at Kia each month is ensuring we get production to meet current levels of demand.
The western European car market is down 6% year-to-date, and southern Europe is in a very depressed state still. There is excess capacity, and some manufacturers have it worse than others. The fundamentals behind the finance offers in the marketplace right now are a depressed European car market, at about 12 million registrations when it used to be 16 million, and some manufacturers having vast amounts of excess production capacity across Europe. Neither of those things will change in the near-term. I don’t believe anyone will back off their current subvented offers.
Are we reaching a peak? Any sort of incentive or subsidised finance depends on where your supply is versus your demand. Ultimately, what’s the role of subvented finance? To increase demand to ensure your demand can meet all of your supply.
At 4.9% on PCP, we are growing and we’re selling the production we can get. I don’t think there’s going to be any escalation from us in the near-term, but I don’t foresee any de-escalation from our competitors who have more aggressive finance rates in the market.
Brown: What’s next for Kia?
Philpott: Our big focus is our Kia Access PCP product; it’s gone from 8% penetration in 2009 to over 75% this year. The back-end of that is the renewal process. Critical to us is the dealers’ competence to retain customers currently on a two- or three-year PCP, and to sell them another new Kia, because when people have renewed once, they’re likely to renew again. That’s our biggest challenge. We get that right, and our growth and momentum will continue.
Through the joint venture operation we’ve got a new online renewal system. All of our dealers have just gone through renewal process training and we’ve just increased our joint venture company field force who work with the dealers.
We’re focusing on the renewal of existing contracts, as well as continuing to achieve high levels of penetration on new business.